Financial Management: Importance, Financial Statements, Ratios, and Improvement Processes

This report discusses the importance of financial management, the main financial statements, utilization of ratios in FM, and processes to improve financial performance. It also includes a review of a business review template. The subject is Business Finance and the course code is not mentioned. The report is relevant for students studying finance, accounting, and business management. The college/university is not mentioned.

BUSINESS FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
SECTION 1......................................................................................................................................1
Defining and discussing the concepts & importance of financial management........................1
SECTION 2......................................................................................................................................2
Explaining the main financial statements and utilization of ratios in FM..................................2
SECTION 3 .....................................................................................................................................3
Reviewing business review template.........................................................................................3
Explaining income statement......................................................................................................3
Describing Balance sheet............................................................................................................4
Explaining the ratios metrics.......................................................................................................5
SECTION 4......................................................................................................................................7
Explaining processes to improve financial performance...........................................................7
CONCLUSION ...............................................................................................................................9
REFERENCES..............................................................................................................................10
APPENDIX....................................................................................................................................11

INTRODUCTION
Financial managements is concerned with managing monetary resources of organization
in such that achieving success can become possible for firm. In current era, there is higher level
of competition which need to be overcome by making appropriate allocation, utilizing and
analyzing resources of company. Current report will comprise concept & importance of financial
management. It will give emphasis on describing main financial statements and utilization of
ratios in financial management. It will give emphasis on completing requirements of particular
case study. This will involve processes for making improvements in lacking areas.
MAIN BODY
SECTION 1
Defining and discussing the concepts & importance of financial management
Financial Management (FM) is associated with dealing & analyzing money and
investment for business so that strategic decision. FM is highly important for gaining the
deeper insights about business functioning so that positive financial position can be obtained.
It provides assistance to develop strategies and long term plan so that objectives can be
accomplished.
It is important practice as helps in strategic planning, organizing, directing and
controlling of financial undertakings so that proper principles can be executed. FM is concerned
to be crucial as provides assistance in maintaining enough supply of funds for the company and
ensuring that shareholders are getting higher return on investment (Brigham and Houston, 2021).
In addition to this, it becomes possible to have optimum utilization of resources and creating sale
investment opportunity so that maximum profitability can be attained. This play significant role
in determining amount of capital required. Capital structure can be properly form' by framing
organizational financial policies and regulations. It helps in controlling finances of company so
that required level of resources can be allotted to all functional areas for having proper
coordination . This gives all relevant information for formulating financial decision-making.
1

SECTION 2
Explaining the main financial statements and utilization of ratios in FM
Thee main financial statement comprises income, cash, change in equity statements and balance
sheet. Each financial statements comprise crucial information which is largely useful for
stakeholders in turn higher ability to take crucial decision become possible.
 Income statement is prepared by involving all expenses and gains so that users can
properly evaluate that business is making profitability or not. It aids in making judgment
regarding efficiency of operational practices for the purpose of getting greater capacity
to recognize irrelevant aspects in turn better decision can be made.
 Cash flow statement provides aggregate data regarding all the money which has been
received and paid from the operational practices and investment sources (Shapiro and
Hanouna, 2019). Net cash flow contribute in taking significant decision by identify
efficiency to meet requirements. It is obtained from three segments which comprises
investment, financing and operational activities.
 Balance sheet is one of the most important financial statement that aids in making
proper evaluation of company's financial health with help of available summarized data.
It is prepared at the end of financial year in turn better view of organizational financial
health can be determined to take accurate & s fair decision.
 Change in equity statement reflects owners capital balance of a business over reporting
period. It is basically reconciliation between the opening, balance and balance of
shareholders equity. This is one of the crucial financial statement that provides
assistance in getting knowledge regarding particular period.
Utilization of ratio
Ratio play important role in financial management as it allows getting information
regarding prevailing operational efficiency so that corrective measure can be applied. It helps
in assessing prevailing trend line so that direction of growth can be identified (Block, Hirt and
Danielsen, 2018). This provides ability to recognize relationship among components. It aids in
comparing performance of company with previous year so that improvements can be
implemented. In financial management ratio play important role in implementing suitable
course of action in turn higher productivity measures can be taken.
2

SECTION 3
Reviewing business review template
The Net Profit for the year 2016, is £43057 (2015: £18,987,000).
The Company’s key financial and other performance indicators during the year were as follows:
2016
£’000
2015
£’000
Change
%
Turnover (continuing operations) 189,711 179,587 +5.6%
Profit for the financial year 43057 18,987 + 27.3 %
Shareholder’s equity 83815 63,057 +32.9%
Current assets as % of current liabilities 222.3 % 304% -82%
Customer satisfaction 4.5 4.1 +10%
Average number of employees 649 618 +5%
Turnover from continuing operations increased by 5.6% during the year, primarily due to the
acquisition of the Extinguishers business on 1 May 2015, which made a full year’s contribution
in 2016.
Gross Profit =£81125
Net Profit = £43057
Net Profit increased in 2016 by 27.3 %during the year.
Shareholders’ equity increased by 32.9% by £20758.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current Liabilities) is
1.47
The company’s “current ratio” (Current Assets divided by Current Liabilities) is2.22
Explaining income statement
Profit and loss account is associated with type of financial statement which reflects the outcome
of business practices during particular period. Accounting profit is calculated by deducting total
expenses from the sum of revenue earned for the particular period (Siminica, Motoi and
3

Dumitru, 2017). From the evaluation of income statement it can be interpreted that net and
gross profitability for the year is 43057 and 81125 respectively. On the basis of this, it can be
identified that organization has good ability to make profitability for the purpose of getting
sustainability in sector.
Describing Balance sheet
4

5

From the evaluative above balance sheet it can be articulated that organization is having
appropriate amount of assets to pay off liabilities. By analyzing illustrated statement it can be
interpreted that company is having total equity of 83815 and comprises both current & long
term liabilities. It can be stated that firm is having equal amount of assets which can be taken
into consideration. It helps in understanding that entity is having sufficient availability of
liquidity to meet its requirements. Financial position of specified organization is having good
condition in sector.
Explaining the ratios metrics
Liquidity ratios are calculated to measure a company's ability to pay debts obligations
and its margin of safety through computing different ratios like current, quick, etc. The above
calculated ratio like current and quick ratio helps in assessing that how effectively company can
pay debts by utilizing cash & equivalents assets the current ratio derived from computation is
2.22 times which is greater than standard bench marking. There are requirements of making
improvements so that excess amount invested in the current assets can be avoided. Quick ratio's
ideal margin is 1 which is less than actual result obtained of 11.47 times. Specified organization
is required to pay attention on this ratios so that better position can be derived.
6

Profitability ratio provides assistance in determining that how effectively company is
earning profitability by selling larger number of goods and services. Gross profit is associated
with making assessment that how much company can decline cost of goods sold to incline
profitability. The achieved outcome for the present study is 42.76 % than is not less than 40%.
on the basis of this it can be identified that company has become successful to reduce
expenditure with aim of increasing gains. In addition to this, net profitability of firm is 22.70 %
which is more than 20% are representing that organization is making proper efforts to increase
sells of goods . This has allowed firm to increase profitability.
7

Inventory and assets turnover ratio is computed to get information regrading efficiency
of firm. The outcome derived from this involves 3.80 that is presenting lower efficiency to
replace stock of the company. It is indicator of the company's low performance which is
required to be improved by taking crucial measures. In the fixed assets turnover ratio there is
need to implement improvement measures so that higher ability to generate revenue can be
derived.
SECTION 4
Explaining processes to improve financial performance
In order to make improvements there are various methods which can be implemented to
get leading position in industry. It is essential to have continuous improvements so that ability to
ado[pt changing circumstances can become possible. In addition to this, from the evaluation of
income statement it can be recognized that firm has incurred various types of expenditures such
as material, labor, administration, etc. to get the specified amount of profitability (Kembauw and
et.al., 2020). For the purpose of declining expenditures company can focus on having proper
cost structure so that maximum level of profitable margin can be set to get achieve greater
revenue. Having proper level of cost structure organization can become capable of reducing
expenditure on irrelevant aspects so that better liquidity can be achieved. For meeting objectives
company can pay attention on increasing efforts like marketing and promotion so that higher
8

revenue can be generated. It will increase possibilities to incline stable condition in market
through concentrating on enhancing brand awareness.
The improvement processes that can be implemented by specified firm to make proper
level of modifications. In order to alter financial position in positive way firm is required to
focus on paying off liabilities so that better liquidity can be maintained by achieving credibility
and trustworthiness in market. Financial performance of organization highly get affected form
decision-making of investors. The reason behind this statement is that entity can negatively
influence by investors' withdrawal if desire level of return is not provided. In addition to this, it
becomes essential for the enterprise to attract customers, suppliers, investors, etc so that positive
level of liquidity can be maintained. These pattern of working can be useful to modify financial
growth & development of company.
From the assessment of calculated ratio it is important to determine their impact on
firm's performance so that maximum level of efforts can be executed to make modifications.
There is need to make apply various course of actions which involves selling unused,
consolidated debts, lowering prices, giving customers various different payment options,
utilizing diverse platform for raising funds. In addition to this, it is essential for specified
enterprise to make identification of lacking areas so that suitable method for bringing change can
be executed (Brigham and Houston, 2021). Particular firm is having lower efficiency in using
assets and replacing inventory as these play important role in affecting financial performance of
company. In respect to this, firm required to implement performance evaluation technique to
check which are lacking areas that are required to be improved. This provides convenience in
eliminating bottlenecks so that barriers can be removed to attain desirable position can be
derived. Inventory turnover ratio can be modified by executing related system which ensures
that there is no under and over stocking so that ability to meet market forces can become
possible. (Bulturbayevich and et.al., 2020). There should be appropriate evaluation of present
resources so that arrangement of funds can be done to meet unforeseen circumstances. For this
purpose, specified organization can utilized diverse approach of raising funds so that mitigation
of risk and cost can become possible.
Specified firm can pay attention on achieving company's growth and development by
making appropriate evaluation of causes for the current processing. In addition to this, selling off
9

unproductive assets, overcoming debts, declining cost, setting price which can be accepted by
customers, etc can aid in meeting organizational objectives. In efficient manner.
From the analysis of above shown performance of company it can be articulated that
company need to give emphasis on recovering outstanding payments, lowering expense,
utilizing suitable pricing strategy, increasing marketing tactics, etc. These actions can be applied
for making modifications so that higher financial position in industry can be derived. These all
course of action can contribute in bringing alteration into all functional areas for obtaining
positive outcome in efficient manner.
CONCLUSION
From the above report it can be concluded that financial management is crucial for
recording, analyzing and utilizing monetary resources so that better progress can be attained. In
addition to this, present report has involved significance of financial management which
includes optimization of resources, maintaining proper finance, framing policies, etc. There are
four crucial financial statements which contribute in taking strategic decision. It has given
emphasis on utilization of resources in FM that includes ability to compare performance, etc.
Methods to improve financial performance has been involved in current report.
10

REFERENCES
Books and Journals
Block, S. B., Hirt, G.A. and Danielsen, B. R., 2018. Foundations of financial management.
McGraw-Hill Education.
Brigham, E.F. and Houston, J.F., 2021. Fundamentals of financial management: Concise.
Cengage Learning.
Bulturbayevich, M.B and et.al., 2020. Modern features of financial management in small
businesses. International Engineering Journal For Research & Development. 5(4), pp.5-
5.
Kembauw, E. and et.al., 2020. Strategies of Financial Management Quality Control in
Business. TEST Engineering & Management. 82. pp.16256-16266.
Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
Siminica, M., Motoi, A.G. and Dumitru, A., 2017. Financial management as component of
tactical management. Polish Journal of Management Studies. 15.
11

APPENDIX
12